Tarullo Says Fed Restrained to Bank-Based Approach for Insurers

July 11 (Bloomberg) -- The Federal Reserve is working to
modify a bank-based capital model to cover insurance companies
as much as they can under Dodd-Frank Act restraints, Fed
Governor Daniel Tarullo told lawmakers at a Senate hearing.

“We’re not in a position to take account of that different
business model in setting requirements,” Tarullo, the Fed
governor in charge of bank supervision, told Senate Banking
Committee members today at a hearing on implementation of the
2010 law. “I can assure you that we’re working as much as we
can on tailoring risk weighting for unique insurance products.
But we are a little bit confined here.”

Insurance-related holding companies were temporarily left
out of capital rules approved by U.S. banking regulators this
week. Tarullo said the regulators pushed insurers out of the
rule while they continue weighing the best approach.

Insurers have pressed the Fed to avoid bank-like capital
rules for firms that may fall within its oversight. Tarullo said
the central bank will weigh “unique characteristics” of
insurance products while being unable to use different demands
for how much capital must be held for specific securities.

MetLife Inc., the largest U.S. life insurer, proposed to
the Fed board an alternative that it said is more appropriate
for companies designated as systemically important financial
institutions, or SIFIs. Prudential Financial Inc., the second-biggest life insurer, has also met with the Fed to discuss
capital standards.

Short-term Funding

The first stage of another rule to deal with risks from
banks’ short-term, wholesale funding could emerge “in the early
fall,” Tarullo told the lawmakers. The Fed will issue advance
language to describe “the way we’re thinking” on how to deal
with the financial industry’s reliance on overnight debt,
Tarullo said. That reliance proved dangerous when the funding
dried up in the 2008 credit crisis.

“The major vulnerability that remains is that associated
with large amounts of runnable, short-term funding,” Tarullo
said. Large firms depending on the funding may be required to
hold more capital, he said last week.

Tarullo and other financial regulators testifying at
today’s hearing said Dodd-Frank measures designed to prevent a
repeat of the 2008 credit crisis will be largely complete by the
end of this year. The Fed will also propose a rule in the fall
that financial holding companies hold a minimum amount of long-term debt to help dismantle the firms if they fail, Tarullo
said.

“We expect to approach the point of substantial completion
of implementation of the Dodd-Frank Act,” Mary Miller, the
Treasury Department’s undersecretary for domestic finance, said
in remarks prepared for the hearing. “That does not mean we
will be able to relax our guard.”

Update Status

Miller, Tarullo, Federal Deposit Insurance Corp. Chairman
Martin Gruenberg and Comptroller of the Currency Thomas Curry
were called before the panel to update the status of the 2010
regulatory overhaul. The Fed, FDIC and OCC completed work this
week on bank capital rules and proposed a tougher leverage
requirement for eight of the largest lenders, including JPMorgan
Chase & Co. and Bank of America Corp.

By the end of the year regulators should complete
implementation of a risk-based capital surcharge for
systemically important banks, a liquidity rule and the Volcker
rule to ban proprietary trading by banks, Tarullo said.

Reviving Glass-Steagall

Senator Elizabeth Warren, a Massachusetts Democrat, said at
the hearing that she would introduce a bill to create a new
version of the Glass-Steagall Act, the Depression era law that
separated commercial and investment banking. Warren said she is
co-sponsoring the legislation with Senators John McCain, an
Arizona Republican, Maria Cantwell, a Washington Democrat, and
Angus King, a Maine independent who caucuses with the Democrats.

“We propose a 21st century Glass-Steagall so that we can
return to the basics and try to keep the gamblers out of our
banks,” Warren said.

She also reiterated her call for regulators to make public
more enforcement actions against banks. In response to Warren,
Tarullo said there may be instances in which making enforcement
actions public would be “warranted.”

“I actually do think that the bank regulators need to
think more about when we put out the public notice of the kinds
of supervisory actions that have been taken,” Tarullo said.